Suncoke Energy, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. SunCoke produces coke for steelmakers, operates a logistics business, and operates a cokemaking facility in Brazil. The company consolidates SunCoke Energy Partners, L.P. (“Partnership”); at quarter-end it held a 60.3% limited-partner interest and the general partner interest.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $350.5 million | $309.7 million |
| Operating income | $31.1 million | $22.6 million |
| Net income (loss), consolidated | $13.0 million | $(57.7) million |
| Net income attributable to SunCoke | $8.7 million | $1.0 million |
| Diluted EPS | $0.13 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $64.0 million | $55.6 million |
| Adjusted EBITDA attributable to SunCoke (non-GAAP) | $45.0 million | $34.0 million |
| Operating cash flow | $57.3 million | $29.5 million |
| Capital expenditures | $15.4 million | $12.7 million |
Revenue rose $40.8 million, mainly from higher domestic coke volumes and coal-price pass-throughs. Operating income improved $8.5 million. The prior-year consolidated loss primarily reflected a $148.6 million deferred-tax charge at the Partnership following IRS regulations on publicly traded partnerships; the $64.2 million portion attributable to public unitholders reduced noncontrolling interests equally and did not reduce SunCoke-attributable net income. Q1 2018 tax expense was $2.0 million, or a 13.3% effective rate.
Domestic Coke Adjusted EBITDA increased to $54.3 million from $49.7 million; Logistics increased to $13.6 million from $13.1 million; Brazil Coke was $4.7 million versus $4.4 million. Domestic Coke capacity utilization was 92% versus 91%, and sales volume was 974,000 tons versus 946,000 tons. Management cited improved Indiana Harbor oven performance and record CMT sales volumes.
Cash and cash equivalents were $147.0 million at March 31, 2018, compared with $120.2 million at year-end. Current assets were $346.8 million and current liabilities $199.9 million. Total debt and financing obligation was $864.0 million net of discounts and issuance costs (gross borrowings of $886.8 million). Operating cash flow increased in part because interest paid fell to $3.5 million from $22.6 million, reflecting payment timing after the Partnership’s 2017 debt restructuring; improved operations also contributed.
Material changes and financing
- SunCoke redeemed its $44.6 million outstanding 2019 Notes on January 11 for $46.1 million, including accrued interest, and funded the redemption with a $45.0 million term loan due in 2022. The extinguishment generated a $0.3 million loss.
- At quarter-end, SunCoke’s $100 million revolver had no borrowings and $73.8 million available after letters of credit; the Partnership’s $285 million revolver had $130 million drawn and $153.1 million available. Combined availability was $226.9 million. Both entities were covenant-compliant.
- Q1 financing cash use was $15.1 million, including $10.6 million in Partnership distributions and $3.4 million to buy additional Partnership units. The Partnership subsequently declared a quarterly distribution of $0.40 per unit, following a distribution reduction intended to support debt repayment and its leverage target.
Outlook, commentary and risks
- Management’s 2018 guidance: Adjusted EBITDA of $240–$255 million consolidated, or $160–$171 million attributable to SunCoke; operating cash flow of $150–$165 million; and capital expenditures of approximately $95 million. Capex includes about $35 million for environmental remediation and $25–$30 million for the Indiana Harbor oven rebuild.
- Environmental projects at Haverhill and Granite City are expected to cost approximately $145 million in total; about $118 million had been spent, with remaining spending expected through Q1 2019. SunCoke contributed $10 million to the Partnership in Q1 and expected to contribute approximately $10 million more.
- Consents decrees addressing alleged air-permit violations at Haverhill, Granite City, and Indiana Harbor were under court review. The Indiana Harbor settlement includes a $2.5 million civil penalty accrued at quarter-end. The Haverhill/Granite City amendment allows additional maintenance time and includes no new civil penalty payment.
- Management described steel-market conditions as improving, citing stronger steel pricing, U.S. trade measures and solid end-market demand; U.S. Steel announced plans to restart a Granite City blast furnace in the second half of 2018. AK Steel had not restarted portions of its Ashland facility. CMT barge activity was disrupted by high Mississippi River levels; flooding also affected KRT thermal volumes.
- Key risks include steel and coal market cyclicality, dependence on a limited number of customers and suppliers, facility reliability, contract renewals, environmental compliance and spending, debt and covenant requirements, and weather or transportation disruption. Coke agreements are generally long-term take-or-pay contracts, but performance and customer credit remain important. Management reported no material change to previously disclosed risk factors.
- The company adopted the new revenue standard in Q1 with no material annual impact. It expects the new lease standard, effective for it in 2019, to increase reported assets and liabilities. Disclosure controls were assessed as effective; the company implemented a new ERP system during the quarter.
Important facts for investors to verify
- Whether the $240–$255 million Adjusted EBITDA and approximately $95 million capex guidance is achieved; Adjusted EBITDA is non-GAAP and not a substitute for cash flow or net income.
- Progress, remaining cost, timing and funding of environmental remediation and the status of the related consent decrees.
- Indiana Harbor oven performance and rebuild spending, and whether announced customer furnace restarts translate into sustained coke volumes.
- Partnership leverage, debt repayment and the effect of the reduced distribution; confirm covenant headroom and revolver availability over time.
- Logistics volumes and margins as river conditions, coal export markets and thermal demand change, alongside exposure to major customers and counterparties.